Abstract

This chapter aims to analyze the evolution of Turkish wage structure following the introduction of new labor law in 2003 in the EU accession process. The authors first present a descriptive picture of the changes in wage inequality between 2003 and 2013. They then conduct an econometric analysis of the relative importance of individual, job- and workplace-related factors on wages across the wage distribution to understand what drives this outcome. It is found that wage inequality decreased from 2003 to 2007, and increased during the global economic crisis. Increased returns to college education, skilled white collar jobs as well as returns to construction sector stand out as the major factors increasing wage inequality. Though to a lesser extent, increased returns to blue-collar jobs, formal job status and reduced returns to employment in large firms are factors reducing wage inequality in Turkey in the post-2003 era.

Introduction

The shift from an import-substitution industrialization strategy to an export-oriented growth model in 1980 marks the major structural change for the Turkish economy. Trade liberalization policies were introduced through a stabilization and structural adjustment program by the International Monetary Fund (IMF) and the World Bank in the early 1980s. This was followed by financial liberalization policies introduced in 1989, during which Turkey experienced volatile economic growth led by short-term capital inflows which was interrupted by two major currency crises in 1994 and 2001 (Onaran, 2007). The Customs Union between the European Union and Turkey went into effect in January, 1996 and led to a further increase in trade volumes accelerating the trade liberalization process.

Besides the direct trade impact of the Customs Union with the EU, there have been important institutional changes, including labor market institutions and its structure, following the reforms implemented in Turkey’s EU accession process. An important dimension of the labor issue relates to the big discrepancy between EU members’ and Turkey’s industrial relations. The EU requires the existence of a strong and well-organized industrial relations system and social dialogue mechanisms as a condition for membership. The EU accession process, therefore, has influenced the labor market policies in Turkey and was influential in the introduction of the new labor law of 2003, in addition to the demands raised by employer organizations to remove labor market rigidities that were inherent in the old labor law of 1971 (Yıldırım & Çalış, 2008).

Labor Act No. 4857 of 2003 constitutes the main legal framework for labor and industrial relations in Turkey. This new law replaced the old Labor Act No. 1475 of 1971, and incorporated the Job Security Act No. 4773 of 2002. The main groups that are exempt from the law are public white collar employees who are covered under Civil Servant Law No. 657, maritime and air transport businesses, and agriculture and forestry businesses with fewer than 50 workers. Considering the large informal sector together with these exemptions, only around half of the active labor force is covered by the new Labor Law in Turkey.

The major change introduced with the 2003 labor law was the introduction of atypical contracts and flexible employment forms that were not legally allowed earlier. Flexible (atypical or nonstandard) employment arrangements include fixed-term contracts, part-time and on-call employment, and temporary employment. The main goals behind this shift to more flexible forms of employment were to encourage formal employment and to increase participation of under-represented groups such as women, youth and rural migrants (Majcher-Teleon & Bardak, 2011). Previous full-time work arrangements were considered to render formal employment costly to firms and to discourage women from work while trying to balance work and family responsibilities.

Another important change in the new labor law was increased job protection against dismissal of regular workers on an indefinite contract in enterprises with 30 or more workers (Majcher-Teleon & Bardak, 2011). However, given the large share of smaller firms in employment in Turkey, this scheme excludes an important number of workers from the increased job protection under the new labor law. For example, in 2013, a total of 52% of all wage earners in the private sector were employed in enterprises with fewer than 25 workers (TURKSTAT, 2013). This implies that more than half of the private sector wage earners cannot benefit from increased job protection due to the minimum-30-worker limit for the enforcement of law. Hence, those firms with fewer than 30 workers have high flexibility in their practice of ending job contracts.